Oct. 17 (Bloomberg) -- Commercial mortgage-backed
securities have more risk than last year as landlords need to
repay maturing debt and vacancies remain elevated, according to
an analysis prepared for insurance regulators.

“Downside risk for CMBS relative to last year’s
assumptions has clearly increased,” according to a report for
the National Association of Insurance Commissioners posted on
the group’s website. The market is “proving itself subject to
highly disruptive shocks” and has less time to deal with the
coming wave of loan maturities, consultants and NAIC staff said
in the report.

Regulators are scrutinizing bonds held by insurers as they
evaluate whether the companies will have enough funds for
policyholder obligations in an economic slump. The report, dated
Oct. 16, was sent to Kevin Fry, chairman of the NAIC’s task
force for valuation of securities. State regulators can demand
insurers hold more funds against assets deemed risky.

The outlook is too negative and doesn’t reflect market
improvements, the American Council of Life Insurers said in a
letter on the NAIC’s website. The ACLI is an industry group
which represents firms including MetLife Inc. and Prudential
Financial Inc.

“We believe the current state of the market is the
healthiest it has been since 2005,” Michael Monahan, senior
director for accounting policy at the ACLI wrote. Proposed
changes in models for CMBS and residential mortgage-backed
securities “will result in an unwarranted increase in capital
charges for the vast majority of securities.”

Building Values

Investors have snapped up commercial and residential
property debt this year as the real estate market has shown
signs of improvement and the Federal Reserve pushed down
borrowing costs, fueling demand for higher-yielding bonds.

The extra yield investors demand to own top-ranked CMBS
rather than Treasuries has fallen to 1.07 percentage points from
2.47 percentage points on Jan. 3 and is down from the peak of
15.07 percentage points in November 2008, according to the
Barclays CMBS Aaa Super Duper index. That’s the lowest since at
least January 2008.